New Kaufmann fund gets muted response

Federated Investors Inc. launched the Federated Kaufmann Large Cap Fund this month in a bid to capitalize further on the success of star managers Lawrence E. Auriana and Hans P. Utsch. But rather than cheer the addition of a third Kaufmann fund managed by the dynamic duo, industry experts have been reluctant to give the new fund their stamp of approval. "Their funds have had good returns, but at the same time, there are a lot of cheaper funds out there that get similar returns," said Katherine Yang, a fund analyst at Morningstar Inc. of Chicago.

HIGH EXPENSES?

It doesn't look as if the Kaufmann Large Cap Fund, which was launched Jan. 7, will be any different, she said. After "waivers, reimbursement and reduction" of total annual fund operating expenses that total 2.66%, the fund initially will be sold with a 1.5% expense ratio, according to the fund prospectus. That is lower than the 1.95% expense ratio attached to the $11.46 billion Federated Kaufmann Fund and the $1.45 billion Federated Kaufmann Small Cap Fund, but it is still too high, Ms. Yang said. Federated, of course, disagrees. Mr. Auriana and Mr. Utsch have proved that their skills are worth the cost, said Meghan McAndrew, a spokeswoman for Pittsburgh-based Federated. The flagship Federated Kaufmann Fund — founded in 1986 and adopted by Federated in 2001 — was the No. 1 mid-cap-growth fund of 34 such funds for the 20-year period ended Dec. 31, according to Lipper Inc. of New York. It ranked third of 53 mid-cap-growth funds for the 15-year period, 15th of 170 funds for the 10-year period, 36th of 404 for the five-year period, 70th of 487 for the three-year period and 143rd of 601 for the one-year period, according to Lipper. The Federated Kaufmann Small Cap Fund, which made its debut in 2002, ranked second of 394 funds its small-cap-growth category for the five-year period, 101st of 477 funds for the three-year period and 249th of 591 funds for the one-year period, according to Lipper. "I think investors can see the added value in performance that Larry and Hans bring," Ms. McAndrew said. But Mr. Auriana and Mr. Utsch have never managed a large-cap fund, so investors will be taking it on faith that they are worth their newest fund's 1.5% expense ratio, Ms. Yang said. "They have clearly proven themselves to be good small- and mid-cap managers," she said. "But that success isn't necessarily transferable to the large-cap arena."

LARGE-CAP EXPERIENCE

Mr. Auriana and Mr. Utsch, however, aren't unfamiliar with large-cap stocks, Mr. Auriana said. Such stocks represent about 25% of the Federated Kaufmann Fund, he said. Also, any evaluation of mid- and small-cap stocks within an industry has to take into account large-cap stocks that may also be in that industry, Mr. Auriana said. "Our expertise is investing in growth companies, irrespective of size," he said. And now is the time to look at large-cap-growth stocks, Mr. Auriana said. "Large-cap stocks have been underperforming small-cap stocks since 2000, with the exception of last year," he said. "It's not a category that's overvalued." Given the recent market downturn, it is hard to imagine that stocks of any size will do well. But if the managers are able to deliver superior "relative" returns, their new fund should be able to attract assets regardless of how the market performs, said Howard Schneider, president of Practical Perspectives LLC, an industry consulting firm in Boxford, Mass. That is assuming that investors can get beyond the hefty price tag, he said. "There are some advisers that will say, 'I'm only focusing on performance. If they can deliver enough added alpha ... I'll pay for that,'" Mr. Schneider said. But the Kaufmann funds would have an easier time attracting assets if they had lower fees, he said. The Federated Kaufmann Fund and the Federated Kaufmann Small-Cap Fund have nearly $13 billion in assets combined. While that is "nothing to sneeze at," the amount isn't large enough to show that the funds have been hugely successful with investors, Mr. Schneider said. "It's not as if they have achieved widespread acceptance," he said. David Hoffman can be reached at dhoffman@crain.com.